Back-to-back briefings last week put a harsh spotlight on the deep hole left by the budget policies of George Bush’s first term. Millions of Americans will be paying the price for the fiscal profligacy of this misnamed conservative government.

The bad news, delivered in the first report, is that the camouflaged domestic spending cuts contained in the Bush budget will — if accepted by Congress — do serious damage to education initiatives, low-income assistance and environmental programs over the next five years.

The bulk of the remainder of the column gives a decent, and largely critical, overview of what will fall prey to Bush’s economic policies (Ready for a surprise? It’s education, the environment, welfare, and — though Broder strangely doesn’t mention this one — veterans benefits).

Naturally, I still have a complaint. Broder writes that

The worse news, documented in the second report, is that these cuts will not even begin to deal with the looming calamity of runaway entitlement spending on the retirement and health care costs of the baby boom generation.

And also

…Medicare and Social Security benefits for the huge wave of boomers, who start to turn 62 in just three years, make the current budget policies “unsustainable” for the long term.

Broder employs a common sleight of hand by not actually saying that Social Security is heading towards bankruptcy (it’s not), but rather twice saying that Medicare and Social Security are in real trouble. The latter statement is technically true, but only because of the dour projections for Medicare costs, which Bush’s policies have exacerbated, not addressed. Let’s turn to honest conservativeTM Bruce Bartlett:

The Financial Report of the U.S. Government for fiscal 2004, released just before Christmas, says the unfunded liability of the Social Security system is $12.5 trillion, an increase of $810 billion over the previous year. However, the Medicare deficit is twice that: $24.6 trillion, a rise of $9.6 trillion from 2003.

In other words, in just a single year, the unfunded liability of Medicare increased by three-fourths of Social Security’s total deficit. Yet instead of reforming Medicare, which is hemorrhaging money, we are talking only about Social Security, which is in sterling financial shape by comparison.

Indeed, not only are we not talking about reining in Medicare’s exploding costs, we are preparing to make them much worse. Next year, the new Medicare drug benefit is fully effective, which will drive up Medicare spending sharply. This is the reason for the rise in its unfunded liabilities. Medicare’s trustees estimate the long-term cost of the drug benefit at $8.1 trillion, accounting for the bulk of its increased liabilities last year.

So no, Broder isn’t actually lying when he says that Social Security and Medicare “make the current budget policies ‘unsustainable’ for the long term.” But he’s only being honest in the same sense in which the following statements are true:

The Defense Department and Medicare are ‘unsustainable’ for the long term.

The Transportation Department and Medicare are ‘unsustainable’ for the long term.

The Department of Homeland Security and Medicare are ‘unsustainable’ for the long term.

Bill Gates, Warren Buffet, George Soros, the Waldens, Michael Dell, Jeff Bezos, and Medicare are ‘unsustainable’ for the long term.

Goldman Sachs, JP Morgan, and Medicare are ‘unsustainable’ for the long term.

And of course, Medicare is not necessarily ‘unsustainable’ for the long term, but its finances are in bad shape, as Bartlett described. Moreover, the Bush administration willfully conflated Medicare and Social Security in order to allege a crisis where none existed (Social Security). At the same time, the administration pushed through a bizarrely crafted drug benefit, thereby exacerbating the problems of the program that actually had, and continues to have, ‘sustainability for the long term’ issues. Astounding!

In fairness to Broder, he almost pulls out a save in the last two paragraphs:

… Reform of these major entitlement programs [Social Security and Medicare] is the pressing need to avoid a budget train wreck in the next generation, but Bush has offered little leadership on that. His Social Security plan — for individual savings accounts — does nothing to address the shortfall in that system. And his “contribution” to solving the more pressing crisis in Medicare has been to add an unaffordable prescription drug benefit to the program.

It is a sorry record for a conservative administration, and we are just beginning to recognize its price.>

While not actually correct, this is more right than wrong. Broder is wrong in that reforming just Medicare but not Social Security would avoid a budget train wreck in the next generation. But he’s correct that Bush’s SS plan does not address the (modest) SSRI shortfall, that the administration made the Medicare problem worse with its prescription drug plan, and that it’s a sorry record for a conservative administration. (Were I a nitpicker, I’d point out that it’s a sorry record for any administration.)

Personal income decreased $238.6 billion, or 2.3 percent, and disposable personal income (DPI) decreased $241.4 billion, or 2.6 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $3.9 billion, or less than 0.1 percent.

…The 2.3 percent decrease in January personal income mainly reflected the effect of the payment of a special dividend by the Microsoft Corporation, which had boosted personal income in December. Excluding this special factor and others, which are discussed more fully below, personal income increased $52.3 billion, or 0.5 percent, in January, after increasing $62.6 billion, or 0.6 percent in December.

Note that the personal savings rate continues to hover around 1% of disposable income. Thus the average worker with a salary of $75,000 per year (which would probably yield disposible income of about $50,000 per year) is currently only saving about $40 per month. By the way, that $40 saved per month includes net debt repayments, since it makes no analytical difference whether the $40 is put into a bank account or used to pay down the principal balance on a loan — both actions increase the individual’s net asset position by $40.

One need look no further to explain the bulk of the US’s current account deficit.

Some people want to know why I seem to think Social Security should be a “litmus test” issue for Democrats. On one level, it’s a complicated question requiring a long answer. On another level, it’s a simple question that’s easily answered. First, Social Security is not some little obscure thing. It’s dull, yes, but it’s also the largest federal program. If anything’s worth fighting over, it’s the largest program out there. Second, privatization is bad policy. I won’t go into that now because I’ve written on it extensively. Third, compromise is bad politics.

I’ve made the case before that privatization is in fact bad policy, largely because social insurance, which shifts risk from risk-averse individuals to the risk-neutral government, creates real value. But that argument was couched in somewhat abstract terms: risk premiums, certainty equivalents, binomial distributions, and laws of large numbers (I’m an economist, that’s how I think). I recently came across a series in the LA Times by Peter G. Gosselin that puts a human face on those very risks which Social Security offers some protection against. See

The series, and the risks and travails it documents, also brings to mind another argument against privatization that I have not seen widely promoted: by reducing the costs of risky but on average value-creating economic ventures — i.e., entrepreneurship and ownership — Social Security encourages those very activities. Thus it’s not at all clear, as its advocates often claim, that privatization would increase overall entrepreneurship. (For a related argument, see this post by PGL.)

It seems to be in voguethesedays, so here’s a few blogs from my blogroll that I think get less traffic than they should (some likely get more visits than we do here at Angry Bear, but may nonetheless be new to many of our readers):

Second, color coded Election 2004 results in which (1) counties are shaded between pure red and pure blue based upon Bush and Kerry’s vote shares and (2) the heights are proportional to voter density (voters per square mile):

It would seem that John Tammy’s disingenious attack on a tax proposal endorsed by John Podesta prompted this reply from John Podesta, which NRO had the courtesy to post. Since NRO also had the good sense to provide links and all, one might wonder if they were actually adopting a sense of decency and honesty. But then read on as this just gave Tammy an excuse to fire back with gems like:

In defending the plan’s income-tax proposal, Podesta correctly points out that “wealthier Americans” have “benefited the most from the Bush tax policies.” But he misses the fact that since “wealthier Americans” pay most of the taxes, any marginal rate cut is always going to disproportionately benefit them. Podesta cites Gregory Mankiw’s “widely read textbook,” which theorizes about tax cuts and asserts that there “is no credible evidence that tax revenues rise in the face of lower rates.” To steal a word from Podesta, citing the theories postulated in Mankiw’s book is a “tired” tactic used by the Left whenever the actual historical impact of income-tax rate cuts prove not to their liking. As Ronald Reagan once said, “facts are stubborn things.”

Facts can also be checked even if Mr. Tammy forgot to mention them. As Dr. Mankiw realized – but I guess Mr. Tammy does not – real income tax revenues per capita fell during Reagan’s term in office. Odd that Tammy hints that there is credible evidence but provides us with nothing as far as data. Better still – did Mr. Tammy bother to actually read Dr. Mankiw’s textbook? If he had, he would have seen references to the facts. Yes, facts are indeed stubborn things – even if the NRO chooses to ignore them.

Errata: Time to provide some data and one correction. Real income tax revenues rose by only 17% during the decade from the end of 1980 to the end of 1990. The civilian labor force grew by 17.5%. So real tax revenues per worker holding or looking for a job fell. Of course, the premise of Mr. Tammy’s free lunch supply-sider rherotic is that long-term fiscal stimulus increases growth even though Mankiw argues it lowers growth – and here the empirical record per the Reagan-Bush41 years is clear: growth averaged a mere 3.0% per year v. the 3.5% average between 1947 and 1980 and the 3.7% for 1993 to 2000. Oh those silly facts.

47 percent believe that Saddam Hussein helped plan and support the hijackers who attacked the U.S. on September 11, 2001 (up six percentage points from November).

44 percent actually believe that several of the hijackers who attacked the U.S. on September 11 were Iraqis (up significantly from 37% in November).

36 percent believe that Iraq had weapons of mass destruction when the U.S. invaded (down slightly from 38% in November).

Normally when I hear stories like this, or that X% of the population can’t name the vice president, I think “that’s funny,” or perhaps, “that’s sad.” But I think Slacktivist has the better take on this:

This Harris poll, in other words, is more damning of those of us in the news biz than it is of the hoi polloi that Leno so enjoys holding up to ridicule.

If you were, say, the head sports editor for The Philadelphia Inquirer and poll results indicated that, say, 47 percent of your readers erroneously believed the Eagles won the Super Bowl, then you should probably consider tendering your resignation.

We’ve all seen the maps contrasting the vast swaths of red voters with the tiny islets of blue voters. In the past I’ve pointed out the obvious in various ways: relatively few people live in those red seas, and measuring political parties’ strengths by acreage is nonsensical.

The Economist is worried about the rapid growth in the world’s money supply over the past couple of years:

HOW loose is the world’s monetary policy? One gauge is that real interest rates in America and other countries are still negative. Another is that global liquidity has been expanding at its fastest pace for at least 30 years. This deluge largely reflects the combined effects of American and Asian monetary policies.

… Central banks are supposedly the guardians of money. Yet between them they may have created the biggest liquidity bubble in history.

With the exception of the stock market crash year of 1987, the world’s money supply has not grown this fast since the mid 1970s. But exactly where has all of this vast amount of liquidity gone? Since output and output prices have not been rising particularly fast, it seems that much of it has gone to fuel asset price inflation. Housing prices have probably been inflated thanks to all of this liquidity (as many people have noted), but so have bond prices. As a result, bond yields have remained unusually low for this stage in an economic expansion.

As the following chart shows, real long-term interest rates have continued to fall over the past year or two even as the economic recovery has gained strength. (I used the average inflation rate over the previous 24 months to proxy for 10-year inflation expectations, and the close correspondence with the 10 year TIPS rate suggests that this is a good first cut at gauging real long-term interest rates.)

The failure of long-term interest rates to rise recently as the Fed has pushed up short term rates has been puzzling to many observers recently, and troubling to some. But I think that the explanation is simply that long-term bonds are one of the only places left for all of this liquidity to go. As we know, much of this newly-created money has ended up in the hands of a few Asian central banks, and they are not in the habit of putting their liquidity into purchases of goods and services, or stocks, or real estate.

This creates what I think is a surprising paradox: the unusually low long-term interest rates that the US is currently enjoying may in fact be the direct result of the US’s financial imbalances, since that is exactly what has put so much of the world’s liquidity into the hands of those Asian central banks. And those financial imbalances are in turn the result of the US’s poor savings. So in a bizarre twist, we may be experiencing a situation where the US’s lack of saving is what is actually keeping interest rates low…

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.8 percent in the fourth quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.0 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 3.1 percent (see “Revisions” on page 3).

The major contributors to the increase in real GDP in the fourth quarter were personal consumption expenditures (PCE), equipment and software, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The following chart shows the growth (averaged over two quarters) in the different components of domestic demand: consumer spending, business investment spending (divided into separate series for residential housing and all other business spending), and government spending.

Although the boom in residential investment (i.e. new housing construction) seems to have tapered off toward the end of 2004, business spending on nonresidential investment goods remained quite strong. Combined with US consumers’ unwavering willingness to keep spending nearly all of their income, this kept GDP growing at a reasonably good pace through the end of 2004. For the year, real GDP growth in 2004 was 3.9%, compared to 4.4% in 2003 and 2.3% in 2002. As I’ve said before, though the economy is currently growing at a respectable rate, the fastest part of this economic recovery seems behind us. The main causes for worry, however, are the US’s enormous and growing financial imbalances.

As a side note, this revision indicates a slightly higher increase in prices in the fourth quarter of 2004 than was initially estimated. The total increase in the GDP deflator during 2004 was 2.4%, compared to 1.7% in 2003 and 1.5% in 2002.